A Key Question for Management Teams: Which Investments Should be Protected During Economic Downturns to Maintain a Resilient Valuation?

During economic downturns, how companies adjust investments can significantly influence their ability to rebound and impact the ability to have a resilient valuation.

Sectoral Shifts: Intangibles vs. Tangibles

The degree to which firms rely on intangible versus tangible investments varies widely by industry. Knowledge-driven sectors have increasingly leaned toward intangible assets as sources of competitive advantage, whereas asset-heavy industries still depend on traditional capital expenditures (CapEx).

Technology & Software: The Intangible Leaders

Technology and software firms exemplify the shift toward intangible-driven investment. Companies in these industries pour substantial resources into R&D and software development, often allocating over a quarter of their revenues to innovation. Biotech and pharmaceutical firms, for example, allocate significantly more capital to R&D compared to traditional industries. This trend underscores how healthcare, technology, and communications sectors—often categorized as the "new economy"—have embraced intangibles more than “old economy” sectors like utilities or mining.

Industrial & Manufacturing: A Balancing Act

Traditional manufacturing industries continue to balance both types of investment. Automotive and aerospace firms have increased both CapEx and R&D over time, yet physical assets such as plants and machinery remain major cost centers. While R&D in manufacturing has grown, tangible assets still dominate overall capital spending.

Energy & Utilities: Capital-Intensive Giants

Energy and utilities rely heavily on tangible assets, from drilling rigs to power plants. While intangible spending, such as geological data analysis and process improvements, exists, it remains secondary. When economic downturns strike, these sectors often react by slashing CapEx—halting new exploration or delaying infrastructure projects—as their R&D is tightly linked to physical operations.

Consumer Goods & Retail: The Brand Powerhouses

Consumer brands and retailers have a dual reliance on tangible and intangible assets. While they invest significantly in supply chains and physical retail spaces, brand development, marketing, and customer analytics play an equally vital role. Historically, however, companies have treated marketing as a discretionary cost, frequently cutting it in downturns—a practice that, as we’ll see, can be shortsighted.

Financial Services: The Digital Shift

Banks and insurers, long dependent on physical branch networks, have transitioned toward intangible investments, such as digital infrastructure, data analytics, and cybersecurity. Today, software and IT development are among the largest investment areas in financial services, reflecting the industry’s ongoing digital transformation.

Downturn Decisions: How Firms Cut Investments in Crises

During economic contractions, businesses face pressure to trim expenditures, often making tough choices between cutting intangible investments like R&D and marketing or deferring tangible CapEx projects. Historically, companies have shown a degree of reluctance to cut intangibles, as these investments underpin future innovation and competitive strength.

Intangibles: More Resilient?

Data from past recessions suggests that companies are less inclined to slash R&D and brand investments than they are to halt capital expansion. For example, during the COVID-19 shock, tangible investment fell more sharply than intangible investment in major economies. Intangible projects—such as software development or pharmaceutical pipelines—often have longer lead times and are harder to restart once halted, making companies cautious about severe cuts.

However, this does not mean firms are immune to slashing intangibles. In both the 2008–09 financial crisis and the 2020 pandemic downturn, surveys found that most companies cut R&D and marketing expenses, often treating them as discretionary rather than essential. The Wharton School found that 66% of businesses reduced innovation and branding investments in 2020, following the conventional playbook of cost-cutting austerity.

Strategic Spending: The Winning Formula

While many firms engage in indiscriminate cost-cutting, leading companies adopt a more strategic approach, protecting critical R&D and brand investments while eliminating lower-priority expenditures. Rather than outright cancellations, some firms reallocate resources to high-impact projects or defer non-essential CapEx to ensure long-term growth. For instance, some industrial companies prioritized efficiency-enhancing capital projects rather than new expansions during recessions.

Tech and pharmaceutical firms have often sustained R&D spending, understanding that competitive differentiation relies on continuous innovation. Meanwhile, commodity-driven industries like energy and mining typically react to downturns by aggressively cutting CapEx, as reducing output preserves cash when commodity prices fall. Consumer-facing companies, on the other hand, frequently trim advertising budgets—a move that, while seemingly prudent, can damage brand equity in the long run.

The Long-Term Impact: Cutting CapEx vs. Slashing Intangibles

A key question for corporate leadership is: which investments should be protected during economic contractions? Historical evidence suggests that maintaining—or even increasing—intangible investments during downturns leads to stronger long-term performance.

R&D and Brand Spending: The Growth Catalysts

Studies consistently show that firms maintaining R&D and marketing investments during recessions outperform those that slash them. Cutting R&D and brand-building efforts may provide short-term relief but often weakens a company’s future product pipeline and market position. Companies that sustain these investments tend to emerge from downturns stronger, capturing market share and driving post-recession revenue growth.

For example, during the 2008–09 recession, some companies kept R&D spending above industry averages despite cost pressures. The result? Steady revenue growth in the following five years and stock performance that outpaced the S&P 500. Other companies followed a similar strategy in 2009 by ramping up R&D, strengthening its innovation pipeline, and positioning to gain marketshare.

CapEx Cuts: A Safer Bet?

Tangible investments, such as facility expansions, are often easier to postpone without long-term damage. Deferring factory upgrades or delaying machinery purchases saves cash and can be resumed when conditions improve. Research indicates that firms that maintained R&D and marketing but reduced CapEx and other fixed costs achieved the highest post-crisis performance.

Investor Sentiment: Rewarding Long-Term Thinking

Financial markets closely monitor how firms navigate downturns, and investor sentiment often hinges on whether a company protects or slashes its intangible investments.

While cutting R&D and marketing can temporarily boost quarterly earnings, savvy investors recognize such cost-cutting as unsustainable. Research indicates that markets penalize firms that drastically cut R&D, seeing it as a sign of weakened long-term prospects. Conversely, firms that continue investing in innovation—even at the expense of short-term margins—often receive higher valuation multiples.

Tech and biotech firms, for example, frequently command premium valuations due to their significant intangible assets, even if immediate profitability is lower. Investors increasingly understand that future growth stems from sustained investment in intellectual property, brand equity, and customer engagement.

Cutting Wisely in Uncertain Times

The historical evidence is clear: while tangible investments are necessary for production and distribution, it is intangible investments—innovation, branding, human capital—that drive long-term value creation. Companies that safeguard these assets in downturns tend to outperform, while those that indiscriminately cut them may struggle to regain competitive footing when economic conditions improve.

The lesson for executives is clear: rather than broad cost-cutting, firms should focus on strategic resource allocation—trimming non-essential CapEx and administrative costs while protecting the investments that fuel future growth. In doing so, they not only survive economic downturns but also position themselves for stronger performance in the recovery